Chapter 38: Onerous Contracts Flashcards
(12 cards)
What is an onerous contract according to IAS 37?
A contract in which the unavoidable costs of meeting the obligations exceed the economic benefits expected to be received.
What must be recognized when an entity determines that a contract is onerous?
A provision must be recognized.
How does the loss from an onerous contract affect financial statements?
The loss flows through profit or loss on the statement of comprehensive income.
What is the journal entry to record a loss on an onerous contract?
DR Loss on onerous contract XX
CR Provision for onerous contract XX
What does the provision recorded for an onerous contract represent?
The unavoidable net costs under a contract.
What are the two components that determine the provision for an onerous contract?
- The net cost of fulfilling the contract
- The penalty or other compensation that must be paid for not fulfilling the contract
If a contract can be cancelled without compensation, is it considered onerous?
No, it is not considered onerous.
When should the provision recognized for an onerous contract be discounted?
When the effect is material.
What generally results from applying a discount factor to onerous contract provisions?
It applies to provisions that are greater than one year.
How often should the provision for an onerous contract be reviewed?
At the end of each reporting period.
What should happen to the provision if the contract becomes more onerous in the future?
The provision should be increased.
What should happen to the provision if a contract becomes less onerous or no longer onerous?
The provision should be reduced or eliminated.
